The book Warren Buffett can't get enough of

Sep 10, 2012

In this issue:
» 'Risks to Indian financial system have worsened'
» Despite the downpour food production will not revive
» Another flood of cheap money. Should India be happy?
» US Fiscal cliff endangering the world: IMF
» ...and more!

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When one talks about what defines 'value investing', the one person that comes into mind is the legendary Benjamin Graham. After all he was the guru of the investment guru Warren Buffett. Therefore we would not be exaggerating if we said that the words of the man himself are nothing short of being the Bible of value investing. First published in 1934, Security Analysis is one of the most influential financial books ever written. Selling more than one million copies through six editions, it has provided generations of investors with the timeless value investing philosophy and techniques of Benjamin Graham and David L. Dodd.

As relevant today as when they first appeared nearly 75 years ago, the teachings of Benjamin Graham, (the father of value investing), have withstood the test of time across a wide diversity of market conditions, countries, and asset classes. The book is a Bhagwad Gita, Kuran and Bible of stock markets. The principals mentioned in there are general, but the choices of investors are personal. The principals can be applied to any stock markets across the globe.

Security Analysis is about valuing the assets, debt, warrants and equity of companies from the perspective of outside investors using publicly available information. The greatest value of Security Analysis, in our opinion, is the margin-of-safety concept, the distinguishing characteristic of true investment; the most fundamental quantitative concept in security analysis, according to Graham and Dodd. The investor is to place prime emphasis upon the presence of a large margin of safety for the security, which should be able to absorb whatever adverse developments are reasonably likely to occur.

Needless to say that Security Analysis is required reading. Any edition is worthwhile, although the 6th edition may be of most interest given the additional material by some leading modern value investors such as Seth Klarmin and Glenn Greenberg.

Which book in your opinion can be called the Bible of stock markets? Do share your views with us or post your views on our Facebook page / Google+ page

 Chart of the day
One of the early lessons that most of us learnt in school about the Indian economy was that it depends on agriculture. Agriculture was always considered to be the backbone of our society. This is why the monsoons have always been watched so closely. After all no rain means bad agriculture which translates to poor economic data. Therefore it would be interesting to note that the contribution of agriculture to total GDP has been declining over the years. It formed nearly 19% of total GDP way back in 2004-2005 (FY05). And as per the latest data the contribution has declined to just 14% in FY12. The main reason behind this is the healthier growth in other sectors that contribute to GDP. Despite the capital invested in agriculture, it has grown by a mere 3.3% annually in the 11th 5-year plan. Though this is better than the 2.4% growth seen in the previous 5-year plan but is nowhere near the growth rates seen in other sectors.

Source: Firstpost

When you operate in a globalised environment there is very little scope for de-risking. Look no further than Indian banking system to confirm this fact. In Reserve Bank of India (RBI) we have a prudent and conservative regulator. Our banks are known to be one of the best capitalized globally. Unlike their Western peers most Indian banks have stuck to the old model of 'boring banking'. However, all of these have not succeeded in keeping Indian banking system's stability intact. In a recent FICCI meet, RBI deputy governor Anand Sinha has echoed this view. This is not the first time that the central bank has expressed worries about stability of Indian financial system. Bad loans piling up from sectors like power distribution, aviation, agriculture, textile etc have already rung the alarm bells. Most importantly the concern lies in the quality of enormous restructured assets. Whether or not this large quantum of loans will be recovered is the big question.

A rebound in rains in the past two weeks has eased the drought situation in more than 50% of India, easing concerns that the weakest rainfall in three years will shrink farm output. It has also improved prospects for crops from rice to corn and soybeans, and eased pressure on government to curb exports to cool domestic prices. The monsoon rainfall deficit has narrowed to 9% from 29% at the end of June with 70% of the country recording normal rainfall. However the improvement in rainfall may not be enough to stop the decline in overall food production. The scanty rainfall in the months of June to August would result in drop in production of pulses and coarse cereals. This is will result in price rise of these commodities and will stoke food inflation which had fallen marginally in the month of July. The year of drought means that the rural economy goes back by at least three years. Which means the brunt is being borne by the farmers. That is a cause for worry. It reduces the average rural income level. Their entire economic cycle is dependent upon what happens in the monsoon season.

If an economy is facing severe headwinds, what are the ways by which the government can boost growth? One way is fiscal initiatives. This includes tax cuts, public investments and policy initiatives that help lift the economy. The other often used tool is monetary policy. Herein, the central bank tries to prop up the economy by increasing liquidity into the system. Traditionally, the way to boost increase liquidity in the financial system was to lower interest rates. But what if interest rates are already too low? For instance, the benchmark interest rates for the US Fed and ECB (European Central Bank) are 0.25% and 0.75% respectively. So, with no further scope for cutting interest rates further, the only option left with the central banks is printing money. Both these central banks are likely to flood the world financial system with cheap money. The ECB has already announced its bond buyback program. The US, too, is likely to witness a third round of quantitative easing (QE3).

How will all this cheap money impact India? In search of higher returns, a lot of this money would find its way into emerging economies like India. This could send share markets soaring. But along with cheap money comes the ugly monster of high inflation. With so much market intervention by these major central banks, currencies are also likely to be volatile. All this is likely to drive gold prices even further.

Are you aware of the three key risks that the global economy is facing currently? If you aren't, there is no need to worry. Christine Lagarde, the head of the IMF has outlined the same for us. As per her, the key risks, not in any order, are the US fiscal situation, the Euro crisis and the medium term public financing. Out of these, the first one i.e. the US fiscal situation has come in for special mention by Lagarde. And why not. Even the US Congressional Budget Office has expressed its concerns over the same. It is of the view that the US$ 480 bn fiscal cliff of automatic spending cuts and revenue changes would probably cause a recession if left unchanged.

A recession would certainly be a strong possibility if the cuts are implemented. But is it such a bad deal in the long run? We don't think so. Spending cuts by Government would mean that much more money available to the private sector that as per us, is a far more efficient user of capital. Thus, the cuts are only going to benefit the nation in the long run. But politicians who are not used to seeing more than a couple of years out, fail to grasp this fundamental premise.

Gone are the days when every public offering would be lapped up by investors. A familiar name and a host of well known investment bankers would be enough to see the issue sail through the markets. In fact there have instances of investors making beeline for stocks of companies with literally zero revenues! Fundamentals and management quality then did not even cross the minds of investors. For all they looked forward to were humongous listing gains within few days. But the poor fate of bad issuances in the IPO market over the past few years have taught some tough lessons. And investors are no longer willing to bet on stories where there is no clarity about the future. Even if the key stakeholder in the entity is the government itself!

The government may have held divestment of stakes in PSUs as its trump card. But without sufficient response from investors the plans are unlikely to sail through. Policy logjam, inefficiencies and scams have clouded the future of most PSUs. As a result, government's divestment plan is but in a fix. The coal scam and irregularities in mining policies are expected to be the biggest hurdle in some major PSU issuances. It is time the government realizes the importance of minority shareholders in PSUs.

In the meanwhile, after opening the day in the green, the Indian equity markets continued to trade above the dotted line. At the time of writing, Sensex was up by 25 points (0.1%). Among the stocks leading the gains were Tata Steel and Sun Pharma. Other major Asian stock markets have closed the day on a mixed note with Taiwan and China closing in the green while markets in Japan and Korea closed in the red.

 Today's investing mantra
"The business schools reward difficult complex ehaviour more than simple behaviour, but simple behaviour is more effective." - Warren Buffett

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    2 Responses to "The book Warren Buffett can't get enough of"


    Jan 24, 2013

    no comment



    Sep 11, 2012

    Security analysis and intelligent investor - both by Ben Graham.
    These two books can change your financial circumstances. Help you achieve your goals.

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